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The Office of the Auditor General has announced it will conduct an inquiry into Labour MP Shane Jones' decision to grant citizenship to Yong Ming Yan in 2008.

A statement from the Office of the Auditor General said Francis Cooke QC would lead the inquiry into Mr Jones decision to grant citizenship against the advice of Department of Internal Affairs officials who had said he did not meet good character requirements, had multiple identities and was under investigation by Immigration at the time.

The terms of reference include the policies and practices of the Department of Internal Affairs in advising Mr Jones, how and why Mr Jones decided to grant citizenship and any other matters the Auditor General considered desirable.

The OAG noted that the inquiry was being done with the agreement of Mr Jones, who has not commented on the decision. The decision on Yan was delegated to Mr Jones by then Internal Affairs Minister Rick Barker who passed it on due to a potential conflict of interest because he knew Yan.

Labour leader David Shearer asked the OAG to conduct an inquiry after Yan's trial in the High Court, saying it was Mr Jones' only chance to clear his name. He stood Mr Jones down from the front bench at the same time, pending an investigation.

Mr Shearer said he welcomed the decision.

"We referred this matter to the Auditor-General because we believe it is important that Shane Jones be given the opportunity to clear his name in the light of claims reported in the media. It is also important that New Zealanders are reassured that the correct departmental and ministerial processes were followed in this case."